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Adverse Selection and the Opaqueness of Insurers

By Tao Zhang, Larry A. Cox and Robert A. Van Ness

Abstract

While adverse selection problems between insureds and insurers are well known to insurance researchers, few explore adverse selection in the insurance industry from a capital markets perspective. This study examines adverse selection in the quoted prices of insurers' common stocks with a particular focus on the opacity of both asset portfolios and underwriting liabilities. We find that more opaque underwriting lines result in greater adverse selection costs for property-casualty (P-C) insurers. A similar effect is not apparent for life-health (L-H) insurers and we find no effect of asset opaqueness on adverse selection for either L-H or P-C insurers. Copyright (c) The Journal of Risk and Insurance, 2009.

DOI identifier: 10.1111/j.1539-6975.2009.01300.x
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